5.1 Taxes, Net Income, and Budgeting

How to read a pay stub, the taxes individuals pay, and how to build a monthly budget on the money that actually lands in your account.

Transcript (193 lines)

0:00 The first Friday of June, a week past graduation, Sadie closes register four at
0:05 Hillcrest Market and clocks out of her first forty-hour week.
0:09 The promotion is a summer one: full-time seasonal, fourteen dollars an hour,
0:14 a one-dollar raise on the wage that funded the festival.
0:18 The paycheck lands that night, and the stub opens with a number she has never
0:22 seen on one week of work: five hundred sixty dollars,
0:26 the exact figure her entire monthly budget ran on last spring.
0:30 Then the deposit clears at four hundred seventy-four dollars and sixteen cents.
0:35 Eighty-five dollars and eighty-four cents left the check before she ever touched it,
0:39 every missing dollar has a name, and this topic reads the stub line by line.
0:45 I'm Logan Shaffer, and this is MAMAKO's AP Business,
0:48 Topic 5.1: Taxes, Net Income, and Budgeting.
0:53 Two skills by the end: read every line of a pay stub,
0:56 from gross pay through each tax and deduction to net pay,
1:00 and build a monthly budget on net income, knowing why the government withholds money
1:05 all year and settles up at tax time.
1:08 Practice questions for this topic are in the next video.
1:11 Let's go.
1:14 A pay stub records three things for one pay period: gross income,
1:18 the deductions removed, and net income.
1:21 Gross income is the total amount earned during the pay period,
1:24 and the employer's compensation scheme determines it:
1:27 an annual salary divided into pay periods, an hourly wage times hours worked,
1:32 a contracted amount for a defined job, or another scheme.
1:37 Sadie's scheme is hourly: forty hours at fourteen dollars is five hundred sixty
1:42 dollars gross, paid weekly on Fridays as always.
1:45 Mandatory deductions come out first.
1:48 They are required by federal, state, and local law, and the employer must withhold
1:52 them and send them to the government directly.
1:55 Line one: federal income tax withholding, twenty-nine dollars,
2:00 taken from a table that reads her as a single filer earning this much every week.
2:05 Line two: Social Security, six point two percent of gross,
2:10 thirty-four dollars and seventy-two cents.
2:13 Line three: Medicare, one point four five percent, eight dollars and twelve cents.
2:19 Those two lines together are payroll taxes, forty-two dollars and eighty-four
2:24 cents, and Hillcrest pays a matching forty-two eighty-four on top,
2:28 the employer's half.
2:30 Line four: state income tax, a flat two and a half percent in her state,
2:35 fourteen dollars.
2:37 Net income, or net pay, is what remains after every deduction:
2:42 five hundred sixty minus eighty-five eighty-four is four hundred seventy-four
2:47 dollars and sixteen cents, about fifteen point three percent of gross gone before
2:52 arrival.
2:55 Net pay can differ from gross significantly, and hers always has.
2:59 Run the old part-time stub through the same four lines:
3:02 one hundred fifty-six dollars gross, minus nine sixty-seven of Social Security,
3:07 two twenty-six of Medicare, three ninety of state tax,
3:11 and zero federal, because that gross sits below the weekly withholding threshold,
3:15 leaves one hundred forty dollars and seventeen cents.
3:19 The about one hundred forty a week this course has used since the festival fund
3:23 was always this arithmetic.
3:25 A full stub carries a second block: voluntary deductions,
3:29 money the employee chooses to route into employer-sponsored benefits:
3:33 health insurance, retirement savings, life insurance,
3:37 health or dependent care savings plans, union dues.
3:41 Sadie's block reads zero on every line, because seasonal roles at Hillcrest carry
3:46 no benefits.
3:48 The card names the empty lines on purpose: they will not always read zero.
3:53 Some are pretax deductions: income routed there is not counted as taxable income,
3:59 which lowers the tax bill and makes the deduction a built-in incentive to save.
4:04 That idea returns with a job in Topic 5.3.
4:09 Individuals pay taxes to federal, state, and local governments,
4:13 and both the types and the amounts vary by state.
4:17 Five kinds cover the list.
4:19 Income taxes are a percentage of income paid to the government:
4:23 her twenty-nine-dollar federal line and her fourteen-dollar state line.
4:27 Her state taxes income at one flat rate; others use rising rates,
4:32 and some charge none.
4:34 For employees, the employer withholds the money each paycheck and pays it in;
4:39 the household then files an annual tax return to pay whatever remains or collect
4:44 a refund of any overpayment.
4:46 Self-employed people have no employer in the middle,
4:49 so they submit their income taxes to the government themselves.
4:53 Payroll taxes fund specific government insurance programs:
4:57 Social Security, Medicare, Medicaid, and unemployment benefits.
5:02 Her forty-two dollars and eighty-four cents funds the first two by name,
5:06 employer half attached.
5:09 Self-employed and contract workers pay the full amount,
5:12 both halves, themselves.
5:14 Sales taxes are charged on the sales price of an item and collected by the business
5:18 selling it, and the business submits the money to the government.
5:23 Sadie has run that pipeline for two years: every shift at register four she collects
5:28 her state's six percent without ever owning a cent of it.
5:32 Next topic she stands on the paying side, because the used car she is saving toward
5:37 will carry about one hundred sixty-two dollars of sales tax.
5:42 Property taxes are based on the value of property a person owns:
5:46 houses and land everywhere, and in some states cars too.
5:50 The bill arrives annually, semi-annually, or monthly;
5:54 her parents pay one on the house she lives in.
5:57 Capital gains taxes are paid when an individual receives a capital gain,
6:01 selling an investment for more than it cost.
6:04 They ride along with the annual income tax return, usually at a lower rate than
6:08 income tax, and they enter Sadie's life in Topic 5.3.
6:14 The table behind the twenty-nine-dollar line assumes she earns five hundred sixty
6:19 dollars every week of the year, twenty-nine thousand one hundred twenty
6:23 dollars annualized. She will not.
6:26 Her actual calendar year runs twenty-one spring weeks at one hundred fifty-six,
6:31 twelve summer weeks at five hundred sixty, and seventeen fall weeks on the part-time
6:36 schedule she has already agreed to, two hundred fifty-two dollars gross,
6:41 plus two unpaid weeks, festival week included.
6:45 Total: fourteen thousand two hundred eighty dollars.
6:49 The federal system taxes that total only above the standard deduction,
6:53 about sixteen thousand dollars the year she files.
6:56 Her income lands under it, so her taxable income, and her federal income tax for the
7:01 year, rounds to zero.
7:03 But the summer table withheld twenty-nine dollars twelve times,
7:08 three hundred forty-eight dollars, prepaid against a tax bill that never
7:12 materializes, while the spring and fall stubs, below the threshold,
7:17 withheld nothing.
7:19 Filing the return is the settle-up: the government sends the three hundred
7:23 forty-eight dollars back as a refund.
7:28 Withholding is a prepayment, the return is the reconciliation,
7:32 and a refund is your own overpaid money coming home,
7:36 without interest.
7:37 The payroll lines never come back.
7:40 Her twelve summer checks paid five hundred fourteen dollars and eight cents of
7:44 payroll tax, money that stays paid, buying Social Security and Medicare credits for
7:50 life.
7:52 Why do households pay such different amounts of federal income tax?
7:56 Three levers.
7:58 First, the federal income tax is progressive: households earning higher
8:03 incomes pay higher rates, and some state income taxes work the same way.
8:08 Second, tax deductions reduce taxable income before the rate applies:
8:13 interest on a home mortgage, contributions to retirement accounts,
8:18 the value of charitable donations, state and local taxes paid,
8:22 and some medical expenses.
8:24 Third, tax credits skip the middle step and subtract directly from the tax owed:
8:30 a child tax credit, a child or dependent care credit,
8:34 credits for specific purchases, and an education credit Sadie meets at community
8:39 college in the fall.
8:42 Budgeting converts the stub into a plan, and the plan starts from net pay,
8:47 the number that actually arrives.
8:49 Four Fridays of four hundred seventy-four sixteen make one thousand eight hundred
8:54 ninety-six dollars and sixty-four cents; she budgets on an even eighteen ninety-six
8:59 and lets the sixty-four cents ride in checking.
9:03 The Unit 3 rule still governs: a budget starts from expected net pay and allocates
9:09 every planned saving and expense for the period, with every obligation carried
9:13 by name.
9:14 June's card, top line first.
9:17 Car fund, twelve hundred dollars: three hundred every Friday by automated
9:21 transfer.
9:23 Forty dollars a week bought a weekend in May; three hundred a week is buying a used
9:28 car by August, and eight such Fridays across June and July will put two thousand
9:33 four hundred dollars next to the six hundred fifty dollars of graduation gift
9:38 money.
9:39 A transfer that large is possible because she lives at home,
9:42 and the budget prices that honestly: a new one-hundred-dollar household contribution
9:47 line, board for the summer she earns full-time.
9:51 The rest of the card: phone share forty, transport sixty for the bus while the car
9:56 is still a fund, food and fun two hundred, gifts and other forty,
10:00 keeping the charitable line alive, and the twenty-dollar parent-advance repayment,
10:05 the same debt line the budget has carried since Unit 3.
10:08 What remains is a two-hundred-thirty-six-dollar buffer,
10:11 and at month's end the unspent buffer sweeps into savings as the seed of an
10:16 emergency fund.
10:17 The lines sum to eighteen ninety-six exactly.
10:21 July's card is identical.
10:23 August's card proves budgets are plans, and plans change when the facts change.
10:28 The car is bought, so the twelve hundred redirects to the emergency fund.
10:32 Transport becomes car operating costs, two hundred fifty-four dollars,
10:37 one hundred sixty-four of insurance and ninety of gas.
10:41 And the parent advance takes its final twenty-dollar payment:
10:44 the one-hundred-dollar debt retires on screen, and her budget carries no debt
10:48 line for the first time.
10:51 The buffer narrows to forty-two dollars, and the card still sums to eighteen
10:55 ninety-six.
10:57 Across the whole summer the three cards account for every cent:
11:01 twelve paychecks total five thousand six hundred eighty-nine dollars and ninety-two
11:06 cents, placed as three thousand six hundred of transfers,
11:10 one thousand five hundred seventy-four of spending, five hundred fourteen of swept
11:15 buffers, and one dollar ninety-two of riding cents.
11:19 One beat for later.
11:21 The Financial Advisor Project that closes this unit opens every client file the way
11:26 this topic opened: with the pay stub.
11:29 Plans are built on net, never gross.
11:34 That's Topic 5.1. The stub explains itself now: five hundred sixty earned,
11:39 eighty-five eighty-four withheld with names attached,
11:43 four hundred seventy-four sixteen deposited, and a budget that gives every
11:47 net dollar a job before the weekend can.
11:50 By the first Friday of August the car fund will be full,
11:53 and the car brings something her budget has never held:
11:56 bills that arrive at random, a fender, a windshield,
12:00 another driver's bumper.
12:02 What insurance actually buys, which risks are worth paying to hand to someone else,
12:06 and which risks she should keep and cover herself is Topic 5.2,
12:11 Managing Personal Risk.
12:14 If this helped, a like tells YouTube to show it to more first-cohort students,
12:18 and subscribing gets you the whole course, in order,
12:21 as it's built.
12:22 And the free AP Business vocab pack, every key term from all five units,
12:27 is waiting at mamako.app, link below.
12:30 The 5.1 practice video is ready next.
12:33 See you next time.

How This Topic Fits the Course

Unit 5 turns the tools of the first four units on a single household. It is not assessed on the AP Business with Personal Finance Exam, which covers Units 1 through 4, so treat this page as course content and personal money learning rather than test preparation. The unit supports the Financial Advisor Project. Topic 5.1 is its foundation, because every plan here starts from a number an employer actually deposits, not the number printed on a job offer.

What a Pay Stub Records

A pay stub is the receipt an employer issues for one pay period, and it records three quantities in order: gross income, the deductions removed from it, and net income. Gross income is everything earned during the period before anything is taken out. The compensation scheme decides it: a yearly salary split across pay periods, an hourly rate multiplied by the hours actually worked, a fixed sum set by contract for one defined job, or some other agreed arrangement.

Mandatory deductions come out first, because federal, state, or local law requires them and the employer must withhold the money and remit it. Four lines are typical: federal income tax withholding, Social Security, Medicare, and state income tax where a state charges one. The two payroll lines come out at fixed statutory percentages of gross pay, and the employer pays a matching share of both.

Voluntary deductions form a second block: amounts the employee elects to route into employer sponsored benefits: retirement savings, union dues, life cover, a savings plan for health or dependent care, and the health premium itself. A seasonal role with no benefits shows those lines at zero. Some are pretax deductions, meaning the income sent there is never counted as taxable income. That lowers the tax bill while funding the benefit, a built in reason to save.

Net income, also called net pay, is what remains once every deduction has been subtracted, and it can sit far below gross. The gross above loses eighty five dollars and eighty four cents to four mandatory lines and arrives as four hundred seventy four dollars and sixteen cents, about fifteen percent lighter. Net is the only figure a budget may be built on.

Line	Amount
Gross pay (40 hours at $14.00)	$560.00
Federal income tax withheld	$29.00
Social Security (6.2%)	$34.72
Medicare (1.45%)	$8.12
State income tax (2.5% flat)	$14.00
Voluntary deductions	$0.00
Net pay	$474.16

One weekly pay stub, gross to net

Framework references: 5.1.C.1, 5.1.C.2, 5.1.C.3, 5.1.C.4, 5.1.C.5, 5.1.C.6.

The Taxes Individuals Pay

Individuals pay taxes to federal, state, and local governments, and both the kinds and the amounts vary by state. Five categories cover nearly everything a household meets.

Income taxes are a percentage of income paid to a government. For employees, the employer withholds part of every paycheck and pays it in; the household then files an annual income tax return to pay any remainder or reclaim anything overpaid. Nobody stands in the middle for a self-employed worker, who files and pays that tax directly.Payroll taxes are withheld the same way but fund specific government insurance programs rather than general spending: Social Security, Medicare, Medicaid, and unemployment benefits. Employers are responsible for half, while self-employed and contract workers owe both halves, which is what a self-employment tax collects.

Sales taxes are charged on the sale price of an item and collected by the business making the sale, which submits the money to the government. A cashier handles that money on every transaction without ever owning a cent of it. Property taxes are charged against what a person owns and what it is worth: land and houses in every state, and vehicles in some, billed annually, semi-annually, or monthly. Capital gains taxes fall on the profit when an asset is sold above what was paid for it, and although they are reported with the annual return, the rate charged is usually below the rate on ordinary earnings.

Framework references: 5.1.A.1, 5.1.A.2, 5.1.A.3, 5.1.A.4, 5.1.A.5, 5.1.A.6.

Withholding, the Return, and the Refund

Withholding is a prepayment, not a final bill, and that distinction explains most of what confuses people about filing season. The table an employer uses reads the current paycheck as though it repeated all year, so a twelve week summer at five hundred sixty dollars a week is read as a twenty nine thousand one hundred twenty dollar year.

The real year rarely cooperates. Twenty one spring weeks at one hundred fifty six dollars, twelve summer weeks at five hundred sixty, and seventeen fall weeks at two hundred fifty two add to $14,280, which lands under the standard deduction. Taxable income and federal tax owed both round to zero, so the $348 withheld across the summer prepaid a bill that never arrived, and filing the return brings it back as a refund.

Framework references: 5.1.A.2, 5.1.B.1.

Why Households Pay Different Amounts

Two workers with the same job title can owe very different federal income tax. Three levers account for almost all of the spread.

Progressive rates. The federal income tax, and some state income taxes, charge higher rates on higher incomes, so the marginal tax rate on the last dollar earned climbs as income climbs.
Tax deductions. A deduction lowers taxable income before any rate touches it: mortgage interest, retirement contributions, the value of charitable donations, state and local taxes already paid, and some medical expenses.
Tax credits. A credit skips the middle step and subtracts straight from tax owed, which makes a dollar of credit worth more than a dollar of deduction. Examples include a child tax credit, a child or dependent care credit, an education credit, and credits attached to specific purchases.

Income sets the rate; the rest of a household's life decides which deductions and credits apply. Framework references: 5.1.B.1, 5.1.B.2, 5.1.B.3, 5.1.B.4.

Building a Budget on Net Income

A budget converts a stub into a plan. It starts from expected net pay for the period and assigns every dollar to saving, spending, or debt repayment before the period begins. Four weekly checks of $474.16 give a monthly planning figure of $1,896.64, and planning on an even $1,896 leaves the change in checking.

Budget lines fall into recognizable kinds. Needs are what living requires and wants improve life without being required. A fixed expense stays about the same each month, such as a phone share or an insurance premium, while a variable expense moves with behavior, such as food or fuel. Everything optional counts as discretionary spending, the first line a plan flexes when another has to grow.

Two lines earn their own names. The savings rate is the share of income routed into saving, and automating that transfer on payday is what lets a large rate survive an ordinary month. The emergency fund holds money for costs nobody scheduled, and it is usually seeded by whatever a plan deliberately leaves unassigned; sweeping that buffer into savings at month end starts the fund.

Budgets are plans, and plans change when facts change. Once the car is bought, its funding line has no job, so a disciplined plan redirects it on purpose rather than letting it drift into spending. Every obligation stays named until it is gone. Framework references: 5.1.C.1, 5.1.C.6.

Worked Examples

Gross to Net on One Weekly Stub

Compute net pay from an hourly wage and the four mandatory deduction lines.

A front-end clerk works a full-time summer week at a grocery store: 40 hours at $14.00 an hour, paid weekly. The state charges a flat 2.5 percent income tax, Social Security is withheld at 6.2 percent and Medicare at 1.45 percent, and the federal weekly withholding table takes $29.00 at this pay level. The role carries no benefits, so every voluntary deduction line reads zero. Find the net pay.

Hours worked: 40
Hourly wage: $14.00
Social Security rate: 6.2%
Medicare rate: 1.45%
State income tax rate: 2.5% flat
Federal income tax withheld: $29.00
Voluntary deductions: $0.00

1. Find gross pay for the period.
Hourly workers gross the wage multiplied by hours worked, so 40 times $14.00 is $560.00. Nothing has been removed yet.
$Gross pay = hours \times hourly wage$
2. Withhold Social Security at the statutory rate.
Social Security is 6.2 percent of gross pay: 0.062 times $560.00 is $34.72.
$0.062 \times 560.00 = 34.72$
3. Withhold Medicare at the statutory rate.
Medicare is 1.45 percent of gross pay: 0.0145 times $560.00 is $8.12. Together with Social Security this is $42.84 of payroll tax, and the employer pays a matching $42.84 that never appears on the stub.
$0.0145 \times 560.00 = 8.12$
4. Withhold state income tax.
A flat 2.5 percent state rate takes 0.025 times $560.00, which is $14.00.
$0.025 \times 560.00 = 14.00$
5. Add the mandatory deductions together.
Federal $29.00 plus Social Security $34.72 plus Medicare $8.12 plus state $14.00 totals $85.84. Voluntary deductions add nothing here because every benefit line is zero.
$29.00 + 34.72 + 8.12 + 14.00 = 85.84$
6. Subtract total deductions from gross pay.
$560.00 minus $85.84 leaves $474.16, which is the amount that reaches the bank account.
$Net pay = gross pay - total deductions$
7. State the gap as a share of gross.
$85.84 divided by $560.00 is about 0.153, so roughly 15.3 percent of the check never arrives.
$85.84 \div 560.00 \approx 0.153$

Check answer

Answer
$474.16. Net pay for the week is $474.16, from $560.00 of gross pay, with $85.84 withheld across four mandatory lines.

Why it matters
The order matters more than the arithmetic. Gross is set by the compensation scheme, mandatory deductions are removed by law before anyone chooses anything, and net is what is left. Every plan built on the $560 figure is overbuilt by about fifteen percent.

The Same Method on a Smaller Paycheck

Apply the gross-to-net method at a pay level below the federal withholding threshold.

Before the summer promotion, the same clerk worked 12 hours a week at $13.00 an hour. The payroll and state rates are unchanged, but this gross sits below the level at which the federal weekly table withholds anything, so the federal line is $0.00. Find net pay.

Hours worked: 12
Hourly wage: $13.00
Social Security rate: 6.2%
Medicare rate: 1.45%
State income tax rate: 2.5% flat
Federal income tax withheld: $0.00

1. Find gross pay.
12 hours at $13.00 an hour is $156.00.
$12 \times 13.00 = 156.00$
2. Withhold Social Security.
0.062 times $156.00 is $9.672, which rounds to $9.67.
$0.062 \times 156.00 \approx 9.67$
3. Withhold Medicare.
0.0145 times $156.00 is $2.262, which rounds to $2.26.
$0.0145 \times 156.00 \approx 2.26$
4. Withhold state income tax.
0.025 times $156.00 is exactly $3.90.
$0.025 \times 156.00 = 3.90$
5. Subtract the deductions.
$156.00 minus $9.67 minus $2.26 minus $3.90, with no federal line to subtract, leaves $140.17.
$156.00 - 9.67 - 2.26 - 3.90 = 140.17$

Check answer

Answer
$140.17. Net pay is $140.17 on $156.00 of gross pay. About 10 percent is withheld here against about 15 percent at the higher wage.

Why it matters
The percentage withheld is not fixed. Payroll and flat state taxes take the same share at any income, but federal income tax withholding depends on how much is earned, and at low enough pay it is zero. That is why the same method has to be rerun whenever pay changes rather than scaled from an old stub.

Annualized Withholding Against the Real Year

Predict a refund by comparing tax withheld to tax actually owed for a full year.

The federal weekly table read the summer stub as though $560.00 arrived every week of the year. The real calendar year was 21 spring weeks at $156.00, 12 summer weeks at $560.00, 17 fall weeks at $252.00, and 2 unpaid weeks. The standard deduction that year is roughly $16,000. Work out the federal income tax owed and the refund.

Weeks at $156.00: 21
Weeks at $560.00: 12
Weeks at $252.00: 17
Unpaid weeks: 2
Federal withheld per summer week: $29.00
Payroll tax withheld per summer week: $42.84
Standard deduction: about $16,000

1. See what the withholding table assumed.
The table annualizes the current check: 52 weeks at $560.00 is $29,120, an income far above what the year will actually produce.
$52 \times 560.00 = 29,120$
2. Add the real year's gross pay.
21 times $156.00 is $3,276. 12 times $560.00 is $6,720. 17 times $252.00 is $4,284. The two unpaid weeks contribute nothing.
$3,276 + 6,720 + 4,284 = 14,280$
3. Compare the year against the standard deduction.
Federal income tax applies only to income above the standard deduction. $14,280 is below roughly $16,000, so taxable income is zero and the federal income tax owed for the year is zero.
4. Total the federal tax already withheld.
The summer table took $29.00 on each of 12 checks, which is $348. The spring and fall checks were below the withholding threshold and took nothing.
$12 \times 29.00 = 348$
5. Settle up on the return.
Tax withheld of $348 against tax owed of $0 is an overpayment, and filing the annual return returns the whole amount.
$348 - 0 = 348$
6. Check what does not come back.
Payroll tax is not income tax. 12 weeks at $42.84 is $514.08 of Social Security and Medicare, and none of it is refunded; it buys credits in those programs.
$12 \times 42.84 = 514.08$

Check answer

Answer
$348. The refund is $348, and the $514.08 of payroll tax withheld over the same weeks stays paid.

Why it matters
Withholding is a prepayment based on an assumption about the whole year, and the return is the correction. A refund means too much was prepaid, which is worth understanding rather than celebrating, and it never includes payroll tax.

Balancing a Monthly Budget on Net Pay

Convert weekly net pay into a monthly plan and solve for the unallocated buffer.

Using a four-week month, convert net pay of $474.16 a week into a monthly planning figure, then balance a plan with these lines: car fund $1,200, household contribution $100, phone share $40, transport $60, food and fun $200, gifts $40, and a $20 repayment on a $100 advance from parents. How large is the buffer?

Weekly net pay: $474.16
Pay periods planned: 4
Car fund: $1,200
Household contribution: $100
Phone share: $40
Transport: $60
Food and fun: $200
Gifts and other: $40
Debt repayment: $20

1. Find the monthly planning figure.
Four weekly checks of $474.16 total $1,896.64.
$4 \times 474.16 = 1,896.64$
2. Round the plan down, not up.
Planning on an even $1,896 leaves the 64 cents sitting in checking. Rounding up would plan money that never arrives.
3. Add every named line.
$1,200 plus $100 plus $40 plus $60 plus $200 plus $40 plus $20 is $1,660.
$1,200 + 100 + 40 + 60 + 200 + 40 + 20 = 1,660$
4. Solve for the buffer.
$1,896 minus $1,660 leaves $236 unassigned. A plan is balanced only when the lines and the buffer sum exactly to the planning figure.
$1,896 - 1,660 = 236$
5. Give the buffer a destination.
An unspent buffer swept into savings at month end becomes the start of an emergency fund. A buffer with no destination is simply unplanned spending.

Check answer

Answer
$236. The plan balances at $1,896 with a $236 buffer, and sweeping that buffer into savings turns slack into an emergency fund.

Why it matters
Every dollar of net pay should have a job before the month starts, including the dollars left over. Naming the buffer and deciding in advance where it goes is what separates a budget from a guess, and it is why the debt repayment line stays visible until the debt is retired.

Practice Questions

4 questions. Nothing here is recorded or scored.

Unit 5 is not assessed on the AP Business with Personal Finance Exam. The exam covers Units 1 through 4. Unit 5 supports the Financial Advisor Project and your own money decisions.

Question 15.1.A.2, 5.1.A.4
Copperleaf Garden Center
Odette Quillen works part time at Copperleaf Garden Center, where her hours swing with the season: about 14 hours a week for most of the year and 34 hours a week through the ten-week spring planting rush, at $15.00 an hour. Her pay for the full year adds up to $13,920, which lands below the income level at which federal income tax begins, so the federal income tax she owes for the year works out to zero. Federal income tax still came out of her spring checks, $270 across the rush, because the payroll table reads each check as though the whole year paid at that week's rate. Social Security and Medicare come out of her checks year round. The owner has now offered Odette the lead grower job for next season at $19.00 an hour, and she is hesitating, because a friend told her that earning more can push a person into a higher tax bracket and leave her worse off.
Which of the following best describes what happens to the $270 of federal income tax withheld from Odette's spring checks?
- A.Copperleaf returns it in her last spring check, once her weekly hours drop back down.
- B.It stays with the government, because tax withheld from a paycheck settles the bill.
- C.Filing an annual return brings it back, since the withholding prepaid a bill of zero.
- D.It counts toward the Social Security and Medicare credits she is building, so it stays paid.
Check answerHide answer
Answer: C
A.
The employer is a collector, not a bank. Copperleaf sends what it withholds to the government on a set schedule, so by summer the $270 is already out of the garden center's hands, and the return Odette files is what brings it home.
B.
Treats a prepayment as a final bill. Withholding is an estimate paid in advance, and the actual bill is figured only once the year is finished and the return is filed. When the estimate runs above the bill, the difference comes back.
C.
Correct. Income taxes are a percentage of income paid to the government, and for an employee the employer withholds a portion of each paycheck and pays it in directly. The household then files an annual income tax return to pay whatever is still owed or to reclaim an overpayment. The payroll table read one $510 spring week as though the whole year ran at that pace, but Odette's real year came to $13,920, below where federal income tax begins, so the tax owed is zero and the $270 was an overpayment from the first dollar. Filing brings it back as a refund, which is money she loaned the government at no interest rather than a bonus for working the rush.
D.
Splits the difference between two lines on the stub. Social Security and Medicare are payroll taxes that fund those programs, and those dollars do stay paid and do build credits. The $270 line is federal income tax, a separate tax that gets settled on the return.
Question 25.1.B.2, 5.1.B.1
Odette asks whether moving up to $19.00 an hour could leave her with less money after taxes than she keeps now. Which of the following is the best response?
- A.Yes, because a higher hourly rate moves her whole year of pay up to the higher rate.
- B.No, because the higher rate applies only to the income above the cutoff.
- C.No, because her federal income tax rate stays the same at any income she is likely to earn.
- D.Yes, because the payroll taxes withheld from her checks climb with her hourly rate.
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Answer: B
A.
This is the worry stated as a rule, and it is the part the friend got wrong. A progressive system does not go back and re-rate income that was already earned below the cutoff; the higher rate reaches forward to the dollars above it.
B.
Correct. The U.S. federal income tax is progressive, so higher incomes are charged higher rates, and the rate that climbs is the marginal rate, the rate on the last dollar earned. Raising Odette's pay from $15.00 to $19.00 an hour lifts her year above the level where the tax begins, and the new rate lands on the income above that line rather than on the income below it. She keeps less of each added dollar than she would have kept tax free, and she still ends up with more money than she has now. What the raise is worth turns on the job itself, not on a fear of the bracket.
C.
The right verdict for a reason the framework contradicts. Federal income tax rates do climb with income, and at $19.00 an hour Odette's year would rise past the point where the tax starts, so her rate is going to move. What holds steady is the rate charged on the income below the cutoff.
D.
The premise is accurate and the conclusion does not follow from it. Social Security and Medicare take a set percentage of pay, so a bigger check means a bigger payroll line and a bigger amount left after that line comes out.
Question 35.1.A.6
A hardware store rings up a customer's purchase of $64.00 in goods, and the state charges a 6 percent sales tax on the sale. Which of the following conclusions is supported?
- A.The customer pays $67.84, and the store submits the $3.84 to the government.
- B.The customer pays $67.84, and the $3.84 is revenue the store earned on the sale.
- C.The customer pays $64.00, since the store owes the tax out of its own sales price.
- D.The customer pays $67.84, then reports the $3.84 later on a household tax return.
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Answer: A
A.
Correct. A sales tax is based on the sales price of an item, so 6 percent of $64.00 is $3.84 and the register total comes to $67.84. The business selling the item collects that tax and submits it to the government, which means the $3.84 passes through the store on its way somewhere else.
B.
Counts the tax as earnings. The store handles the $3.84 but owes it to the government, so it belongs in a tax payment rather than on the store's revenue line, and treating it as income leaves the store short when the payment comes due.
C.
Puts the tax on the wrong side of the counter. Sales tax is added to the sales price and paid by the buyer at checkout, and the seller's job is collecting that money and passing it along.
D.
Sends the payment to the wrong filer. An annual income tax return settles a household's income tax, while sales tax is submitted by the business that collected it, which is why the customer's part of this job ends at the register.
Question 45.1.A.3
Two years ago a household bought shares in a fund for $3,000 and this year sold those shares for $4,200. The household also earned wages during the year. Which of the following best describes how the $1,200 gain is taxed?
- A.The gain is withheld from the household's paychecks during the year of the sale.
- B.The gain goes untaxed, since tax was already paid on the income used to buy the shares.
- C.The gain is taxed at the same rate as the household's wages for that year.
- D.The gain is reported with the annual return, usually at a lower rate than wages.
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Answer: D
A.
Withholding is an employer's job, and it covers pay. Nobody withholds tax from a sale of shares, so the gain reaches the government through the return the household files rather than through a paycheck.
B.
Taxes the wrong dollars. The $3,000 the household put in was taxed back when it was earned, and the tax here falls on the $1,200 the shares gained on top of that purchase price.
C.
Half of this holds up. The gain is reported on the same return as the wages, and that is where the similarity stops, because a capital gain is charged at its own rate rather than at the rate on ordinary income.
D.
Correct. A capital gain is what an asset earns above what was paid for it, here $4,200 minus $3,000, or $1,200. Capital gains taxes are submitted with the household's annual income tax return, and the rate charged on the gain is typically lower than the rate the same household pays on the income it works for.

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6 common mistakes on 5.1

The wrong moves students actually make on these questions, why each one is wrong, and what to do instead. Part of the practice tier.

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Essential knowledge covered

5.1.A.1 · 5.1.A.2 · 5.1.A.3 · 5.1.A.4 · 5.1.A.5 · 5.1.A.6 · 5.1.B.1 · 5.1.B.2 · 5.1.B.3 · 5.1.B.4 · 5.1.C.1 · 5.1.C.2 · 5.1.C.3 · 5.1.C.4 · 5.1.C.5 · 5.1.C.6

5.1 Taxes, Net Income, and Budgeting

How This Topic Fits the Course

What a Pay Stub Records

The Taxes Individuals Pay

Withholding, the Return, and the Refund

Why Households Pay Different Amounts

Building a Budget on Net Income

Worked Examples

Gross to Net on One Weekly Stub

The Same Method on a Smaller Paycheck

Annualized Withholding Against the Real Year

Balancing a Monthly Budget on Net Pay

Key Terms

Practice Questions

6 common mistakes on 5.1

Essential knowledge covered